Financial plans are essential to the plans for retirement, saving for major expenses, such as children's education, for most individuals. If too little is saved, or the wrong investments are made, individuals will not be able to maintain their lifestyles in retirement, may not be able to send their children to desired schools, or may find themselves outliving their savings. On the other hand, if more sums than are needed are set aside for future needs, individuals may find themselves unnecessarily denying themselves and their families even minor luxuries, such as vacations and larger homes. Professional financial planners and individuals have a variety of ways of creating financial plans. The financial services industry has adopted standardized means of projecting out individual financial plans. There currently exists today no program or mechanism that allows an individual to have an accurate perception of what would have happened to their financial plan historically. In lieu of actually doing that, which is also a little bit insufficient, the financial services industry has adopted two standard means, either a simple annualized return or a statistical estimation of future values. The fundamental flaw with those standard means is: 1) they use either an assumed rate of investment return over the whole period of time, and as can be proven mathematically, lacks any relation to what the values will be in the future even if those annualized returns are received, or 2) they try to statistically calculate to come out with a forecast of statistical probability of the distribution of outcomes; by the very nature of the statistical estimation, those do not really relate to actual historical experience. In either case, the fundamental problem in any financial plan done with any of these standardized tools, either using simple annualized return as a means of estimating future values or a statistical estimation of future values, that the plans do not accurately predict the future wealth of the individual using the financial plan. For example, existing prior art tools help the individual figure out a risk tolerance, and then request the user to furnish a return expectation is or determine what the return expectations should be for the risk tolerance. These prior art tools then advise the user to expect a certain return, or a certain outcome based on a certain return, allowing for projected cash flows.
The lack of accuracy in prediction, as noted above, causes great problems for the individual. The individual may fail to meet his financial goals or forego opportunities in trying to meet those goals. A financial plan may direct an individual to save more money then she needs to, or retire later than he or she needs to. A financial plan may advise an individual that he may retire earlier than he should, or withdraw more money than he should from investments. All of this advice results from the estimation errors made through either of the current industry norms.
Financial plans are generally reviewed and revisited once every few years. The financial plan and forecasting tools are not meant to help the individual client make decisions on a daily basis about the implications of making an asset allocation decision or making purchasing decisions or retirement decisions. These decisions tend to be very long term in nature and updated fairly infrequently. Even if the tools were accurate, predictions may be made after investment, spending or retirement decisions have already been made. Their inherent nature is such that they are not updated on a regular basis. Such plans provide little support for investors to make investment decisions.
For example, an investor feels wealthy because he has received some great market returns. His plan called for saving $20,000 a year, and he intends to continue to do so. His current plan said he was supposed to have $2 million at a given time, and because of great market return, he now has $2.5 million. He then decides to make a major purchase using a portion of the additional $500,000. He fails to rerun his financial plan. He does not know how making that purchase decision will affect his likelihood of achieving his long-term goals.
An object of the invention is to provide a method for evaluating financial plans to determine the likelihood that an investor will meet the investor's financial goals.
An advantage of the present invention is that such a method is provided. Additional objects and advantages will become evident from the detailed description of a preferred embodiment which follows.